Wednesday, March 10, 2010

The Congressional Research Service (CRS) just released "The Proposed Comcast-NBC Universal Combination: How it Might Affect the Video Market." Prepared early last month, the now-public CRS report takes no overall stance on the proposed merger itself. Rather, it notes that the U.S. Department of Justice and the FCC will likely approve the Comcast-NBCU deal. Nor does CRS report make any hard predictions about the likely effects of the merger, if approved. But the report does provide an overview of some of the arguments that recently have been advanced from different quarters about the perceived benefits or perceived harms that the merger would bring.

Although the CRS report purports to summarize claims being made about the proposed Comcast-NBCU merger made by others, the report does seem to offer an overly sympathetic treatment to claimed vertical integration threats to programming access. The report reads:

Perhaps the greatest danger that a vertically integrated company poses to a non-integrated competitor is to deny the competitor access to must-have programming that it owns or controls. Lack of access could even foreclose competitors from the market. Inferior or more expensive access to that programming also could place non-integrated rivals at a competitive disadvantage.

The report then discusses disputes over cable company ownership of regional sports networks (RSN) as a situation that "[t]he FCC has identified…where a vertically integrated cable company is likely to benefit from exclusivity, to the detriment of competition and consumers." The report points out that Section 628 of the Communications Act and the program access rules adopted by the FCC to implement that section, among other things, prevent vertically integrated cable operators from discriminating in the prices, terms, and conditions at which it makes its satellite-delivered programming available to its competitors. The CRS report insists those same rules "prohibit a vertically integrated cable operator from having exclusive access to the programming in which it has an attributable interest." (Whether the statute permits application of the program access rules to terrestrially-delivered programming as the FCC concluded in a recent rulemaking order is a matter of debate and will likely be litigated.)

All of what the CRS report says in this regard may be true, or at least mostly true. But taken in a vacuum, it can also be somewhat misleading and thereby exaggerate the potential competitive harm. Vertical mergers do not typically present the kind of competitive harm to consumer welfare characteristic of horizontal mergers. As the FCC observed in the Adelphia Order, "vertical transactions, standing alone, do not directly reduce the number of competitors in either the upstream or downstream markets."

FSF Distinguished Adjunct Senior Scholar Richard A. Epstein addressed some of these issues in his recent FSF Perspectives paper "The Comcast and NBCU Merger: The Upside Down Analysis of Dr. Mark Cooper." Describing the potential harm from merger transactions as "increase in market concentration to the extent that it allows the new firm to raise its prices above the competitive level," Professor Epstein wrote: "As a matter of basic theory, this risk may materialize in horizontal mergers, but rarely will appear in vertical ones, which involve the integration of two facilities or services at different levels in the chain of production." And, " the vast bulk of this transaction lies on the vertical side of the line, which involve the linkage of a transmission company — Comcast — with a content company—NBC Universal."

Absent contextual emphasis on the contrasting competitive dynamics of horizontal and vertical mergers, one can easily read too much into conceivable harms posed by a vertical integration like Comcast-NBCU. The CRS report, however, puts vertical integration threats to programming access more in the context of "big-is-bad" concerns. The report's opening line reads: "The proposed combination of Comcast, the largest distributor of video services in the United States, and NBC Universal (NBCU), a major producer and aggregator of video content, would create a huge, vertically integrated entity with potentially enormous negotiating power." But reduction of transaction costs and technology economies resulting from vertical mergers that make a merged entity bigger typically benefit consumers.

In addition, it's worth remembering that although the FCC has previously concluded in the Adelphia Order and NewsCorp-Hughes Order that a vertically integrated cable or DBS provider might have incentive to temporarily foreclose RSN access to its competitors, it has not so held that cable or DBS providers have the incentive to engage in permanent foreclosure. Regardless, Comcast will not be acquiring any RSNs in the proposed merger.

Of course, the CRS will hardly be the last word out of Congress on Comcast-NBCU. The Senate Commerce Committee will continue the ongoing examination of the merger with a hearing Thursday. FCC Chairman Julius Genachowski will testify about the Commission's license transfer approval process. DOJ Antitrust Division Chief Christine Varney is also set to speak. But all such testimony and discussion of the proposed merger should be considered in the context of a vertical integration.